Sam is our first CFA exam blogger. He was born and raised in Illinois, working in New York. He is waiting for his CFA level 1 results in late July.
After the exam and a nice break, the first thing I did was to follow Stephanie’s tips in building my 3 financial statement:
1. Download a 10K
I go to the Edgar search to download the latest 10K (annual financial filing of US publicly listed company) on Kellogg. I also download the latest 10Q (quarterly report) as supplementary reading.
2. Study the 3 Statements
I take a good look at each item in the balance sheet, income statement and cashflow statement, as well as a couple of others. Although my FRA study was such a rush, I did seem to retain most of what I’ve learned in the process. Nice.
I start asking questions: what is the revenue growth? Margins? Free cash flow? How about the operational and leverage ratios?
3. Read the Notes
I used to skip all the notes because the 10K is dead boring to read. (Typically, look for the numbers, plug them in Excel, and dump the 10K aside).
But now, I determined to master FRA and are forcing myself to do it. Interestingly, the notes helps a lot to further understand the statements. I’ll make sure I go through the notes at work from now on.
4. Build the Model from Scratch
This is the fun part. It took me a couple of hours to build, fix the errors and get it done. It’s a huge sense of accomplishment!
It isn’t as complex as I thought and it feels awesome to see how everything flows. I took another half an hour playing around with the model, just to see how the change affect other parts of the statements.
5. Repeat with a More Complicated Company
I need a break, but I plan to rinse and repeat with a company with more complex structure.
Ideally, if the two companies are in the same industry, I can compare their financial health with all the ratios. But then, if they are in different industry, it could be an interesting comparison to see how the industry impacts the ratios and so on.
We can learn so much more by this exercise than reading the text books.
Note from Stephanie
I am so glad you are trying this out, with excellent results!
This is one of the suggestions from our CFA FRA page.
For those who need help to start building such a model, you can look for textbooks with step-by-step instruction on how to build one in Excel. It will likely take you half a day or even a day, but the exercise is worth the time and effort. Good luck everyone!